Archive for the ‘DRM’ Category

Have you ever watched a horror movie where you see the innocent victim unknowingly walk into the clutches of the horrible monster / murderer? You want to shout at the movie screen in some vein attempt to warn the victim in some way. Instead, you end up closing your eyes as you feel powerless to alter the course of the gruesome events about to occur. In many ways, that’s the feeling I had while reading an excellent article by Seth Mnookin on Wired.com. Seth interviewed Universal’s CEO, Doug Morris, and provided excellent insight into the thought process going on at Universal in terms of its digital music strategy. Read on if you have a high tolerance for frustration as the story is one of greed and ignorance.

“For the past several minutes, Morris has been listening to Rio Caraeff, executive VP in charge of the company’s digital strategy, tell me how the sagging fortunes of the music industry highlight the need to diversify revenue streams. Caraeff explains that the company will eventually need to transition from running a product-based business to running a service-based one. He talks about ringtones, subscription services, and deals with mobile providers, stressing the need to raise the industry’s “digital IQ.””

To set the stage, the picture is painted of Doug Morris being a successful record executive who’s spent is career on traditional music industry issues such as identifying musical talent, etc. Morris admittedly knows nothing about technology and it appears as though he doesn’t want to be bothered with it. As such, he surrounds himself with people like Rio Caraeff (the person in charge of Universal’s digital strategy) who seems to be capable of nothing more than blathering on with a moderate dose of buzzwords. Right off the bat, I take issue with the “strategy” they start to talk about. Caraeff goes on about raising the industry’s “digital IQ”. The problem is, technology isn’t the problem. Consumers don’t have a “digital IQ” problem. I believe the music industry is fully aware of what consumers want. By talking about “digital IQ”, they mean finding a way to force people to pay for a product they don’t want in such a way that the music labels can make a very large profit margin and keep control of distribution on their terms. It would be nice if they were honest enough to just state that right up front.

“But digital strategies are important these days, and Morris has become entangled in them whether he wants to be or not. Over the past several years, he has been one of the most staunch and vocal proponents of aggressive copyright enforcement, at one point publicly blasting MP3 players as merely “repositories for stolen music.” “

It’s certainly understandable why Morris is bitter. He’s been sitting on fat profit margins for years and has been able to oppress and control the artists at will. With the introduction of digital music, there is a paradigm shift taking place and it’s “upsetting the Apple cart” so to speak. At the same time, each change like this also brings new opportunities. Instead of capitalizing on these new opportunities and possibly offsetting a decrease in revenue flow from one area by increasing revenue flow from another, Morris just takes a bitter attitude towards consumers. As I stated in the past, treating your customers as criminals is not a recipe for success. It’s wrong to assume every portable music player is filled with stolen music. Sure, it happens, but very large percentages have been paid for in the form of CD purchases in the past. Some of it is purchased online and sure, some of it is stolen. The thing is, the right strategy is to figure out why people are stealing music rather than to just look at your potential customers with disdain.

“And in November 2006, Morris parlayed Microsoft’s desperation to establish a true alternative to the iPod into a $1 ransom to Universal for every Zune music player sold — and that’s on top of the licensing fees Microsoft pays to have Universal’s songs in its Zune Marketplace online store. It’s a sign of Morris’ power that he is able to pressure so many players in the technology world to bend to his will.”’

This was just one example mentioned which illustrates how Doug Morris is a powerful and influential music executive. He’s used to getting his way. I still shake my head in disgust at the notion of Microsoft paying Universal $1 for every Zune sold on the premise that everyone with a portable music player is stealing Universal’s music. I place shame on Microsoft for giving in to such behavior. That’s like rewarding a child for throwing a temper tantrum.

“Last summer, though, Morris seemed to change direction. After years of tightening controls on his company’s content, he agreed to let Amazon.com and other online retailers sell unprotected MP3s of Universal songs. These contain none of the digital rights management software that media companies usually embed in digital files to prevent piracy. Universal wasn’t the first big label to offer unprotected tracks; the EMI Group had begun selling DRM-free songs in May. But with its small market share, EMI’s decision seemed unlikely to have much effect on the market. Universal, on the other hand, was setting out to change things. In particular, it hoped to end Apple’s near monopoly on legal digital downloads.”

This is an example of why I don’t believe Universal is as technically naïve as they claim to be. Clearly they are aware of consumer’s desire for DRM free music. Though selling DRM free music goes against their desire, they are now doing it in an attempt to attack Apple.

Brief history overview:

In short, the music industry was losing money each year because people were buying fewer and fewer CDs each year. In fact, in 2006, sales declined 10% from the year before. This has been going on since roughly 1999 – 2000. Since the music industry was not offering a product that consumers wanted, they resorted to “sharing” music on peer to peer networks. Apple stepped in and offered an on-line music sales strategy, complete with the distribution and sales. All the music labels had to do is share their catalog of music and sit back to collect the pay checks. The problem is, Apple became very successful at selling music on-line. In fact, Apple has a near monopoly for on-line music sales with the iTunes music store. Roughly 85% of legal music sold on-line is sold through Apple. Apple is now the third largest seller of music, only behind Best Buy and Wall Mart (brick and mortar stores) in sales. Now, companies like Universal realize they don’t have the control they want over Apple as they have become to powerful. So, Universal is attempting to attack Apple and undermine their success by offering products like DRM free music through other vendors like Amazon.com.

Back to the story:

Of course, the crux of the problem is an ego issue for Morris. He makes an analogy to describe his view of the music industry.

“”There was a cartoon character years ago called the Shmoo,” he says in a raspy tenor. “It was in Li’l Abner. The Shmoo was a nice animal, a nice fella, but if you were hungry, you cut off a piece of him and put onions on it, and if you wanted to play football you just made him like a football. You could do anything to him. That’s what was happening to the music business. Everyone was treating the music business like it was a Shmoo.”

Morris is bent on making sure his company isn’t taken advantage of. In principle, there’s nothing wrong with that. However, a leader of a company needs to have a long term strategy and clearly, his ego is preventing him from doing that.

“”It was only a couple of years ago that we said, What’s going on here?’ Really, an album that someone worked on for two years — is that worth only $9, $10, when people pay two bucks for coffee in Starbucks?” Morris sighs. “People never really understand what’s happening to the artists.”

The problem with analogies is that they rarely work as well as people intend them to. This is no different. The value of something is merely limited to the amount someone else is willing to pay. Comparing the price of a cup of coffee to a copy of a music track is not as simple as it seems. That $2 cup of coffee can only be sold to one person. That copy of music can be sold to millions of people if it’s good enough. So, is that album really only worth $9? Also, what about the artists? The music labels have been raping them for years. Apparently, very few artists actually make money from record contracts. Instead, they do it for publicity so they can make their real money doing concerts, etc.

“Morris goes on to rail against criminal-minded college students and low-life punks who steal the music that his artists work so hard to create. He admits to being fairly ignorant about technology and insists that his job is to nurture the creative side of the business — work that’s being threatened by all of this other nonsense.”

Yeah, that’s right; all college students are criminal-minded low-life punks. That’s the attitude that’s going to win them over as customers. The word dinosaur comes to mind here as Morris is out of touch with his potential consumers and their needs. If I were on the board of directors for Universal, I’d seriously have to question why someone with this sort of mentality is in charge.

“The problem is that a strategy based on quick returns is unlikely to pull the music industry out of its morass. After all, it was a reluctance to look farther down the road that got the labels in trouble in the first place. But Morris is much less interested in figuring out how to make digital music work for everyone than he is in not being the Shmoo.”

Too late, he’s a shmoo.

“Morris was as myopic as anyone. Today, when he complains about how digital music created a completely new way of doing business, he actually sounds angry. “This business had been the same for 25 years,” he says. “The hardest thing was to get something that somebody wanted to buy — to make a product that anybody liked.””

Once again, the analogy of the dinosaurs comes into play. As Morris admits, the music industry was the same for 25 years. Morris was very successful in the cassette tape and CD era. That time has passed. Digital music is both the present and future of music. Morris isn’t fully onboard and is reluctant to change. The future doesn’t look good for Universal with Morris at the helm.

“Morris insists there wasn’t a thing he or anyone else could have done differently. “There’s no one in the record company that’s a technologist,” Morris explains. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?””

Sorry, but ignorance is not an excuse. It’s one thing to get caught off guard when times change. That happened to the entire industry. It’s another thing to make excuses why they still are not embracing technology the way they should and to claim there is nothing different they could have done. Considering there are still things they need to do, I find Morris’ attitude rather frustrating. Since he doesn’t know what to do, I’ll offer some free advice.

1. Start by understanding your customers.

a. Why are they stealing music? Is it because “they can” or is it because they are not offered the product they want? In reality, it’s a combination of the two. You will never be able to stop people from stealing “because they can”. No form of DRM has ever been successful in that way. This type is not a potential customer. Instead, the focus should be on selling to customers that are not currently offered the right product.

b. Are you offering the right product? The quick answer is no. Consumers want DRM free digital downloads. You can sell a compressed format (like mp3) for less money (less than $1) and a full CD quality track for more in a lossless format like FLAC, etc.

2. Understand who your partners are and work with them rather than against them.

a. Apple brought the music industry into the digital age. Yes, technically, there were one or two subscription based services prior to Apple’s deal, but none of the subscription services have ever had any success. You’ve had great success with Apple. Use that as the blue print for success and move forward with other vendors.

b. Similarly, don’t bite the hand that feeds. You’re fighting for control with Apple because they have become “too successful”. Does that right? You asked for their help, now you’re upset with them because it worked? The fight is over, Apple has control and they don’t seem to be backing down. Good for them. They better understand what consumers want. Listen to them. Offer them the same DRM free tracks that you are offering their competitors like Amazon.com, etc.

3. Understand that your relationship with consumers has changed.

a. The music industry has become accustomed to dictating the terms to the artists, to the music resellers, etc. Consumers have revolted and resorted to file sharing. That’s not going to change. You can’t just shut down a peer to peer network. As one hole is plugged, another opens. There is no single entity to attack here. Instead, you have come up with a strategy to win your customers over.

b. In conjunction with the RIAA, stop suing your potential customers. Stop referring to college kids as “criminal minded low-lifes”. This attitude makes people want to steal music instead of buying it.

This is just the basics, but everything I’ve listed above should be common sense. There are short term and long term consequences to these actions. Doug Morris is going to have to focus more on the long term goals rather than how to make short term profits.

“And its current moves — DRM-free songs and the Total Music subscription service — aren’t about serving consumers, at least not principally. They’re aimed at taking on Steve Jobs and, specifically, limiting the power of iTunes.”

This is stupid. Apple is successful in the music business because they understand consumers needs better. They have the best music players, the best music jukbox software, the best on-line music store, consistent and fair pricing, etc. They’ve been the most successful ever since they entered the market and have taken on all challengers. In short, their success is not a coincidence or a matter of being at the right place at the right time. That’s not going to change anytime soon. Apple has the better leverage at this point and Universal would be foolish not to continue to cash in on it. There is no amount of “free music” that is going to want to make me put down my iPod for a Zune. The fact that Morris actually thinks he’s in control of this is laughable.

“With the record companies on board, Jobs did something remarkable: He turned the labels’ demand for bulletproof DRM into a way of locking up the retail end of the online market. Jobs argued that in order to make Apple’s DRM software, called FairPlay, effective, it had to be proprietary — and since Jobs won’t license FairPlay, tracks sold on iTunes can be played only on iPods. (Similarly, the iPod won’t play DRM-encoded files purchased through other retailers.) This lack of interoperability, combined with the iPod’s overwhelming dominance, gave Apple a stranglehold on the digital music marketplace. And Jobs got to be the good guy with consumers, blaming the mess on the music industry’s pigheaded insistence on DRM.”

Considering the fact that on average only 3% of every iPod contains music purchased from the iTunes music store, I’d say there is no truth to the paragraph above. There is no real evidence that any significant amount of people aren’t sticking with iPods because of Apple’s proprietary DRM.

“When I suggest to Morris that the labels gave Jobs license to create what was in effect an Apple Walkman that played only Apple cassettes, it’s Caraeff who answers. “Looking back, the best thing we could have done would have been to mandate one format,” he says. So why didn’t that happen? Morris is happy to field this one. “It never crossed anyone’s mind!” he exclaims. “We were just grateful that someone was selling online. The problem is, he became a gatekeeper. We make a lot of money from him, and suddenly you’re wearing golden handcuffs. We would hate to give up that income.””

Two things here… First, the iTunes music store isn’t successful because of the proprietary DRM. That is, it would be equally successful if the songs were sold DRM free in an open format. Second, Universal is making a lot of money from Apple’s sales. These are sales that would have been illegal downloads in most cases. Why isn’t Morris embracing Apple and trying to do more business with them?

“Total Music is designed to unify Apple’s competitors in what amounts to a coordinated attack on the iPod. The details are far from finalized, but in Morris’ conception a Total Music subscription would come pre-installed on devices like the Zune, the Sony PlayStation, or a mobile phone. Universal is well aware of the difficulty of convincing consumers to pay for music subscriptions, so Morris wants the devicemakers to pony up the cash themselves, either by shelling out for a six-month introductory offer or by assuming the cost forever.”

Well, I have no doubt that Microsoft will jump in on this. They are already paying Universal 1$ per Zune sale as it is. They are also desperate enough to try anything they can to knock Apple off its perch. Finally, Microsoft has the deep pockets to do this and sustain a loss for an extended period of time if it suits them. The problem is, this is a strategy based on greed. I can’t imagine other vendors doing this for any significant period of time. Consumers have made it clear enough that they don’t want a subscription model. I’m fairly confident that device makers aren’t going to foot the Universal subscription bill “forever” either. Really, this plan is DOA.

“Unfortunately, Total Music will almost certainly require some form of DRM, which in the end will perpetuate the interoperability problem. Morris likely doesn’t care. He is more committed to Total Music — or any other plan that allows protection — than he is to a future where music can truly be played across any platform, at any time. “Our strategy is to have the people who create great music be paid properly,” he says. “We need to protect the music. I know that.””

In short, Morris’ plan is to continue to not offer consumers the product they want. He doesn’t care about interoperability problems consumers continue to face with DRM. He claims that he’s doing this in the interest of making sure the artists get paid, but in the end, he’s only serving to minimize sales by not offering what consumers want. He could get away with this way of thinking of file sharing didn’t exist. Unfortunately for him, it does. I’m quite certain there isn’t a single song in Universal’s library that isn’t readily available for download, albeit illegally. The industry has tried for years to put a lid on file sharing but by the very nature of the internet, this is impossible. The source and method may change, but file sharing isn’t going away. Worse, Morris’ attitude on the matter is only serving to drive consumers away and seek alternate methods of getting the product they want, even if they do it illegally. Right now, it’s not hard to rationalize file sharing. If the same product (or better) were offered through legal channels, it would be much harder to rationalize.

“The irony is that if he decides to base his plans around DRM, Morris will be missing the larger truth that has propelled his business for the past 30 years. Ultimately, it’s convenience and ease of use that drive new media formats. That’s why cassettes made inroads against records, why CDs killed them both, and why MP3s are well on their way to burying CDs. Morris is right when he says music is more popular than ever, but he’s wrong to assume that will automatically lead to higher profits for the major labels. “Locking things up is actually good for piracy,” says David Pakman, CEO of eMusic, an online retailer that sells DRM-free songs from independent labels. In other words, the more restrictions you put on your files, the more you encourage customers to turn to illegal services to get songs the way they want them.”

Exactly.

“Back in his dining room, Morris is incredulous. He’s once again talking about how his job should simply be finding and breaking new acts. The problem, he says, is that “there’s sympathy for the consumer, and the record industry is the Shmoo.””

Gee… I can’t imagine why there is sympathy for the consumer in these cases.

Conclusion

This was a great article by Wired.com’s Seth Mnookin. It provided excellent insight into the mind of Doug Morris and how the digital revolution caught Universal (and the entire music industry) by surprise.

Unfortunately, for Doug Morris, it also brought to light his level of incompetence. While Morris helped build an empire and that should certainly be recognized, he’s a dinosaur both in age and in his way of thinking about the industry. Also unfortunate is that Universal is paying for his ignorance in the form of steadily declining sales. Consumers are paying for Morris’ ignorance by not getting the product they want. In short, having a dinosaur like Morris at the helm of Universal is a lose / lose situation for everyone involved. Based on the comments in this article, I doubt Morris has the capacity to change and adapt to the digital music era. I’m not sure appointing a buzzword blathering “yes man” in charge of your company’s digital strategy adds any value either.

On a final note, I couldn’t help but read the Wired.com article and come away not wanting to pirate their music. As someone who doesn’t advocate stealing music, this is a bad thing. I can only image how articles like this will only serve to rationalize the actions of the younger generations today (Or, in Doug Morris vernacular, these “criminal-minded low-lifes”).

As readers of this blog may know, I’ve been keeping tabs now and then on updates within the music industry, particularly as it relates to digital rights management (DRM) and other related consumer issues. In a recent article, the head of Warner Music, Edgar Bronfman, confirmed the position the music industry has taken with their own customers.

“Speaking at the GSMA Mobile Asia Congress in Macau, Edgar Bronfman told mobile operators that they must not make the same mistake that the music industry made.
“We used to fool ourselves,’ he said. “We used to think our content was perfect just exactly as it was. We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.””

On the surface, this appears to be an epiphany for Brofman, but in reality, he’s just stating the obvious. He’s stating something that consumers have been telling him for years. He’s stating something that bloggers have been telling him as well. This is not just an issue for Warner music group; this is an issue for the music industry as a whole.

I also take special note of the following statement in particular: “we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.”

The question is, does Bronfman believe in what he is preaching? At this point, I’d say no. Consumers don’t want DRM with their music downloads either. The independent labels have dropped DRM, EFI (one of the big for labels) has dropped DRM. What is Warner waiting for? If Bronfman is in tune (pardon the pun) with consumers as he claims to be, why isn’t he allowing DRM free downloads? Actions speak louder than words. Bronfman’s words sounds like typical marketing speak to me.

“Bronfman suggested that mobile companies have much to learn from Apple, despite being critical of and iTunes in the past.”

Again, Bronfman goes on to talk about Warner’s partnership with Apple and how they are now offering bundled products such as full albums with ringtones, videos, etc. Again, it’s clear that Bronfman is in full marketing mode rather than addressing the real issues. If he can learn so much from Apple as he claims, why isn’t he dropping DRM as Apple has been calling for? It would have been nice if someone at the conference actually challenged him on this topic just to watch him back pedal.

Other bloggers have weighed in on the topic with similar opinions. One comment in particular helps bring the “war with consumers” better into focus.

“After all, it was Edgar Bronfman Jr. himself who very actively declared war on consumers who were file trading in the summer of 2000. As the head (at the time) of Universal Music, Bronfman Jr. announced that he was preparing to send “an army of lawyers” after file sharers. That’s not “standing still or moving at a glacial pace.” The “war” wasn’t inadvertent. It was an active decision by Bronfman Jr., which kicked off the entire RIAA war against consumers. “

That sort of distills Bronfman’s role in the music industry over the past years about right. These aren’t exactly the highlights you’d want read at your retirement dinner one day.

Conclusion

It seems to me that if someone were to make a sincere apology / admission of guilt, they would mention the real issues. Bronfman is right when he claims to have “gone to war with consumers”, but it surely wasn’t limited to “standing still or moving at a glacial pace” has he suggests. Bronfman has actively gone to war with consumers. He’s right, customers have won in the sense that they the music industry as a whole is losing money and consumers are getting what they want, albeit illegally in many cases.

I’d like to think this is the first step towards enlightenment for Edgar Bronfman, but I can’t help but doubt it. He half-heartedly acknowledged his mistakes. Not only did he try to spin his mistakes into something much more passive, but he followed up his admission with a bunch of marketing speak. The thing is, nobody really cares. I doubt any significant percentage of people would purchase music or boycott music published by Warner because of anything Bronfman says or does. However, Bronfman does have the power to do the right thing and offer customers the product they want in the form of quality music downloads without DRM restrictions. Apparently, he’s not ready for that yet, but it’s plain to see that this is the inevitable path they must take if they (Warner) are to survive and prosper in the future.

Over the past 10 years, there has been a paradigm shift in the music industry. The record labels were slow to evolve with the changing times and as a result, they’ve been suffering from a steady decline in revenue. Recent events are only making things worse for the once mighty industry. Like a wounded animal, the music labels are lashing out against potential consumers and business partners without a clear and coherent plan for survival.

Slow to evolve

The problem for the music industry started in the late 90’s, when the .mp3 format became popular. By shrinking the file size to roughly 1/10th the size, it became feasible to store a large collection of music on your computer. The combination of disk storage growing at an exponential rate, broadband internet connections becoming common and a new common music format have the makings for a paradigm shift.

For years, the record companies have been able to force consumers to pay outrageous prices for music. Even if you just liked one song, for the most part, you had no choice; you had to buy an entire CD or simply do without. In some cases, singles were available, but they were never a popular alternative due to price, size, etc.

Peer to peer file sharing services began to pop up which made searching for and sharing content very easy. The first popular service, Napster, was shut down because it was a centralized service. That is, you had to log in to a centralized Napster server before connecting to another peer client to share music. The RIAA was able to shut this down as they were able to prove music was being illegally traded and Napster was never able to control the content that was being shared. This gave way to decentralized peer to peer networks that essentially can never be shut down because nobody owns or controls the networks. You can’t very well sue a gun company when someone uses a gun to kill someone. Just the same, you can’t effectively sue a software maker for making peer to peer client software. It’s just a utility that lets you share files, legal or illegal. It’s no more the obligation of the software company to control how the program is used than it is the obligation of the gun company to control how the gun is used. Additionally, even if the RIAA could sue a particular software company, similar software would pop up with origins in other countries. It’s a pointless battle to fight.

Rule #1: Provide the customer the opportunity to pay for a product they actually want.

When you are the single source of content that people want to buy, you can be arrogant and set your own prices. You can make your customers pay for things they don’t want like forcing them to buy an entire CD instead of a single song. You can dictate the format that your customers will be forced to use.

Of course, when the same product is available elsewhere, now you have a problem. This is what happened to the record labels. Music piracy became very popular, not because there are so many people that want to be thieves. Rather, it’s because consumers were able to obtain exactly the product they wanted, in the format they wanted. The fact that the music was available for “free” probably didn’t hurt. Yes, it was stealing and it is clearly wrong to do so. However, the fact that it happened was unavoidable. The record labels were arrogant. They did not acknowledge their customer’s demands for online music for years. By the time the labels realized they need to do something, they didn’t know what to do. They started offering subscription based services like Rhapsody, etc. However, the music was heavily laden with DRM (digital rights management) restrictions and wouldn’t even allow you to burn it to CD, etc. In effect, if you wanted to obtain music online, you had a choice: pay an on-going subscription fee or just download (steal) the music in an open format like .mp3. Is it really any wonder why piracy was and still is so rampant in the music industry?

The problem has been compounded over time. Because piracy was the only practical way to obtain the bulk of ones music collection, it has become culturally acceptable in our society to some extent. This is especially true with the younger generations. There is a real problem when we have a younger generation that completely doesn’t understand the concept of paying for music.

The online music sales model does work

Apple was eventually able convince the labels to sell their music online through the iTunes music store. This was a great stride in the right direction. It allowed you to own the music and even burn it to CD, etc. Unfortunately it still came with DRM restrictions. Though many people refuse to purchase music with DRM restrictions, Apple has been successful with selling music online. To date, Apple has sold more than 3 billion songs and is now the #3 music reseller, behind Wallmart and Best Buy. Clearly the online model has proven successful.

The only real barrier to sales is the use of DRM. Consumers do not want DRM. Consumers do not want to have to register one computer and not forget to unregister that same computer before they get rid of it. Consumers want fair use of their music. They want the ability to burn it to a CD or transform it to another format, possibly for another music player that they have. These are basic freedoms that consumers have every right to demand. The record labels need to fall in line here, or continue to suffer from rampant piracy.

Seeing the light

Under pressure to open up its DRM scheme to other vendors, Steve Jobs wrote an interesting article back in February 2007 that outlined the problems with the music industry and called for the labels to drop the requirements for DRM.

The independent labels were ready to drop the DRM requirements, but the “big four” (Universal, Sony BMG, Warner and EMI) were not ready to do so. In April 2007, EMI, the smallest of the big four, fell in line and announced that they would sell DRM free music through Apple’s iTunes music store.

This was a huge step in the right direction, but it came with a caveat. The music would even be offered at a higher quality (256bps vs 128bps), but come at a higher price. The DRM free music would be sold at $1.29 per song whereas the DRM laden music would continue to be sold for $.99 per song. This wasn’t ideal for consumers, but it was a reasonable compromise. The record labels wanted to charge more for their music and this was a way to do it. To date, only EFI has “seen the light” and realized that DRM is not an effective means of preventing piracy.

Testing the waters

Universal is “testing the waters” so to speak by offering DRM free music through a few vendors like Amazon.com, etc. However, they are specifically not offering DRM free music through Apple. This seems odd to me. Apparently, Universal is not happy with the agreement they’ve made with Apple. Apparently, Apple gets $.29 for each $.99 song it sells. Considering Apple sets up the store, pays for the storage, pays for the bandwidth to deliver the music, pays for the development of the iTunes software which acts as the jukebox and integrates with the iPod, etc. , they pay for the sales / credit card transactions, etc. The price Apple charges seems reasonable to me.

If Universal is unhappy with the price they get for each song, why not offer their music through the iTunes plus store at $1.29. Surely they’d get more money per song, right? Instead, they are selling their music through Amazon.com who is selling their DRM free music in the .mp3 format for just $.89 per song. So, one has to question what this is all about. Clearly it’s not an issue of how much money per song Universal wants to get. It’s about unseating Apple’s market leading position with on-line music sales. Universal figures that if they can further split the market, Apple will have less leverage then they currently have. It’s a bold move, but Apple clearly has the leverage here and they know it. Universal refused to enter into another long term agreement with Apple, yet, they know they can’t pull their music library from Apple because Apple is the #3 music seller overall and the number #1 music seller online by a large margin.

A recent article in Business week talks about Universal’s recent actions.

Universal knows they don’t have enough power by themselves, so they are trying hard to get Sony and Warner to stand against Apple in an attempt to renegotiate their terms. We’ll have to see what happens. Here are a few quotes that I found amusing:

“Morris and his allies hope to move digital music beyond the iPod-iTunes universe by nurturing the likes of Microsoft’s Zune media player”

The assumption Universal’s Doug Morris is making here is that the iPod is popular because of the iTunes music store. This is just wrong on so many levels. For starters, Apple’s own estimates are that on average, the amount of iTunes music store (iTMS) content on the average iPod is about 3%. The iPod’s popularity existed before Apple even had a music store for iTunes. The iPod is popular because it’s the best portable music player on the market. Period. It’s the best design, it’s easy to use and navigate through the menus. The click wheel design has proven to be very popular and much less cumbersome than what’s being offered by the competition. Additionally, the iTunes software (not the store) is considered by most to be the best music juke box software. The seamless integration between the computer, the iTunes software and the iPod hardware has set the iPod in the dominant position.

“The service, which is one of several initiatives the music majors are considering to help reverse sliding sales, will be called Total Music. (Morris was unavailable for comment.)

This isn’t only about Jobs; Morris badly needs to boost his business, and Apple is the one to beat. The iTunes store has grabbed about 70% of downloads in the U.S. And the iPod–well, what’s left to say about that juggernaut? Plus, music companies have been here before. A few years ago they launched services with the aim of defeating Napster-style file-sharing–and failed miserably. And let’s not forget that existing subscription services have signed up only a few million people, vs. hundreds of millions of iTunes software downloads.”

Getting to the point, Universal, like other big labels, is facing declining sales and they don’t know what to do. Apple has helped them by providing an effective online sales channel in an attempt to curb piracy. With 3 billion songs sold, it would seem Apple has been effective. Now, they are getting greedy and realizing that online sales will eventually eclipse the sales of CDs sold in stores. As such, they want a bigger piece of the pie. The labels are frustrated that nobody has been able to compete successfully against Apple.

“While the details are in flux, insiders say Morris & Co. have an intriguing business model: get hardware makers or cell carriers to absorb the cost of a roughly $5-per-month subscription fee so consumers get a device with all-you-can-eat music that’s essentially free. Music companies would collect the subscription fee, while hardware makers theoretically would move many more players. “Doug is doing the right thing taking on Steve Jobs,” says ex-MCA Records Chairman Irving Azoff, whose Azoff Music Management Group represents the Eagles, Journey, Christina Aguilera, and others. “The artists are behind him.””

Subscriptions? Really, is this their magic plan? Yes, subscription services would be the most profitable for the music labels, but fortunately, consumers have been smart enough to reject this nonsense to date. Now, the plan is to get the hardware makers to pay a subscription fee? Are they kidding? I’m still using a 4th generation iPod that’s now several years old. I can’t imagine any hardware vendor in their right mind actually biting on this one. This is clearly an act of desperation.

Also what’s with the “The artists are behind him” quote? I certainly can’t speak for every artist, but I never hear artists speaking favorably about their record labels. It’s generally understood that most artists make very little from record deals and they generally end up having bad relationships with their labels.

Bad will

Generally speaking, I’ve always understood the artists deal with the record labels as a necessary evil. We know the record labels have made lots of money over the years. There have been countless hard luck stories about how they’ve treated the artists. They’ve charged unreasonable prices for music and as such, are not well liked by consumers.

To make matters worse, the RIAA has been busy trying to sue people for stealing music. Don’t get me wrong, it’s their right to do so. In fact, if they don’t try to fight piracy in some way, they are sort of condoning it.

That said, suing your potential customer base is generally not a good idea. The RIAA is hoping for high publicity from their lawsuits. They are trying to send a message. The problem is, they end up suing teenage kids whose parents aren’t aware of what their kids are up to. In terms of industry image, this has backfired on the music industry. At least in some cases, I’ve seen this provoke some to pirate more. Worse, it’s inconceivable that a jury recently awarded the RIAA a $222,000 lawsuit against a single mother on the basis that she made 24 songs available for download. There apparently wasn’t even any evidence that files were uploaded from her computer. Now, I have no doubt she did illegally share music files with others. However, I’m quite sure the punishment doesn’t fit the crime in this case. I’m also quite sure this publicity being generated from all of this is not working in the favor of the record labels.

Bypass the labels all together

The result of the bad will generated from the labels isn’t just coming in the form of music piracy. One of the biggest upcoming rock artists, Radiohead, has recently decided to release their latest record without a contract from a record label. While I don’t agree with their “pay whatever you like” business model, I do see that cutting out the “middle man” as an obvious conclusion for many.

“Radiohead’s contract with EMI/Capitol expired after its last record, Hail to the Thief, was released in 2003; shortly before the band started writing new songs, singer Thom Yorke told TIME, “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one. And, yes, it probably would give us some perverse pleasure to say ‘F___ you’ to this decaying business model.””

Clearly, there is a larger backlash coming from the current business model.

“Even under the most lucrative record deals, the ones reserved for repeat, multi-platinum superstars, the artists can end up with less than 30% of overall sales revenue (which often is then split among several band members). Meanwhile, as record sales decline, the concert business is booming.”

Is it really any wonder why artists have a problem with the type of contracts they are given? Lesser known artists don’t do nearly as well.

“”This feels like yet another death knell,” emailed an A&R executive at a major European label. “If the best band in the world doesn’t want a part of us, I’m not sure what’s left for this business.””

The labels are starting to be scared about this – and rightfully so.

Artists also have other choices. They could skip the labels and sell directly to on-line sources like iTMS, Amazon.com, etc.

Conclusion

The record labels have built an empire based on what is now considered to be an out dated business model. As times have changed the record labels have been slow to adapt. Changes in technology have made music piracy not only easy but common. The record labels have been slow to offer what consumers want: CD quality music at a reasonable price ($.99 per song for example) in a non-DRM format. The record labels have been slow to even offer music for sale online and are only just now “testing the waters” with DRM free music sales.

I have a few suggestions for the record labels.

#1 – Offer a product people want to buy.

For any business to be successful, they need to offer a product that consumers want. Ideally, it would help if they didn’t treat their customers as criminals. The music can be stolen without DRM restrictions, so why punish your legitimate customers? I’m not aware of a single song that can be purchased and is not also readily available to steal.

#2 – Work with your partners, not against them.

Companies like Apple have brought the music business into the 21st century by offering a solid business model along with the best tools of the trade in terms of online store. It’s the benchmark by which all other online stores will be compared. Don’t work against companies like this, work with them.

#3 – Think about the message you are trying to send.

The RIAA may be acting on your behalf, but they are neither effective in curbing piracy, nor are they helping the image of the music labels. In one of the links above, they’ve already admitted that their legal actions have been a losing proposition. Clearly, they are spending more money on their legal actions then they are receiving from their settlements and lawsuits. It’s plainly obvious that they haven’t made a dent in curbing piracy either. The money they are spending would be better served in educating people why it’s necessary to support the artists and not steal. Make people want to do the right thing. Some people will steal regardless of what you do and it’s unlikely you’ll be able to make a dent in attempting to prosecute any significant number of them.

#4 – Consumers don’t want subscriptions for their music.

Really, is there anything in history that would lead these record labels to think that subscription based sales works for the music industry? Hasn’t this been attempted already with each attempt failing miserably? I realize greed is the motivating factor for schemes like this, but does anyone consider doing a sanity check here? Imagine selling a lower end device for $79. In just over a year’s time, the manufacturer would have to give that much money to the music labels. That’s insane. Equally insane would be to bake that cost into the new products. Let’s see, I could by brand x for $100 or brand y for $300 and have the privilege of downloading free music legally. Really, Universal’s plan is dead in the water before it starts. A healthy dose of common sense is needed here.

The reality is, the music labels are facing a rapidly declining business. For example, it was reported that Universal’s earnings fell 25% for the first half of this year. Much like the now extinct race of dinosaurs, the existence of the music labels is being threatened. They don’t understand their customer’s wants and needs. They are suing their potential customers and they are striking out against their own business partners. Worse, they come up with the most ridiculous subscription based business models in an attempt to go back to the days of fat margins, etc. These are acts of desperation, and it’s sad to see. Not only are consumers rejecting them, but it seems that artists are beginning to reject the labels as well. Time will tell if artists are able to be successful with this business model. I would image that if you cut out all of the middle men, you don’t need to sell as much music to be profitable anyway.

Finally, I know it’s easy to watch this on the side lines and play armchair quarterback. However, the items I mentioned really should be common sense. Perhaps the labels need to take a fresh look at things. If they are able to adapt and evolve, there is hope for their future. If these labels continue to flail about like a wounded animal, they are doomed to extinction like the dinosaurs they emulate.

Macrovision and Sandisk’s recent open letters to the entertainment industry are an embarrassment to the technology industry and an insult to consumer’s intelligence.

February 22, 2007

Fred Amoroso, CEO & President of Macrovision has responded to Steve Job’s open letter to the music industry. While I respect Macrovision’s desire to protect its business model, I can’t help but view Amoroso’s open letter to “Steve Jobs and the digital entertainment industry” as an embarrassment.

My first article covering my thoughts on DRM was fairly comprehensive in scope in terms of what DRM is, what the major concerns are and who the major players are. I thought most of the drama had played out for the time being until I read Macrovision’s open letter to the entertainment industry.

Macrovision is a company whose sole purpose is to implement various forms of DRM. They’re responsible for making it difficult to copy media on VHS, DVDs and various other formats. As such, it’s actually quite understandable that they’d be very upset if the entertainment industry would begin to dismiss the notion of DRM as a requirement much less the notion that DRM serves any practical purpose. That is, if a company’s livelihood is at stake, one would expect that company to form an intelligent rebuttal. The key word is “intelligent” rebuttal. By “intelligent”, I mean the rebuttal should lay out the reasons in favor of DRM in such a manner that is convincing to both the record companies and consumers alike. While I think they tried to do just that in theory, they failed miserably in practice.

For a funny interpretation of Amoroso’s letter, read the following blog on the subject:

DRM is broader than just music –
While your thoughts are seemingly directed solely to the music industry, the fact is that DRM also has a broad impact across many different forms of content and across many media devices. Therefore, the discussion should not be limited to just music. It is critical that as all forms of content move from physical to electronic there is an opportunity for DRM to be an important enabler across all content, including movies, games and software, as well as music.

To me, this seems to indicate Amoroso sort of acknowledges that DRM doesn’t make sense with regards to the music industry. He doesn’t come out and actually acknowledge this, but he’s not challenging the merits of the points made in Job’s letter. Remember, Jobs was only speaking about DRM with regards to the music industry (at least for now). Amoroso seems to be attempting to draw attention away from the music industry specifically. Why would he do this? The only reasonable conclusion I can see is that the music industry is the weakest industry to defend the use of DRM for.

DRM increases not decreases consumer value –
I believe that most piracy occurs because the technology available today has not yet been widely deployed to make DRM-protected legitimate content as easily accessible and convenient as unprotected illegitimate content is to consumers. The solution is to accelerate the deployment of convenient DRM-protected distribution channels—not to abandon them. Without a reasonable, consistent and transparent DRM we will only delay consumers in receiving premium content in the home, in the way they want it. For example, DRM is uniquely suitable for metering usage rights, so that consumers who don’t want to own content, such as a movie, can “rent” it. Similarly, consumers who want to consume content on only a single device can pay less than those who want to use it across all of their entertainment areas – vacation homes, cars, different devices and remotely. Abandoning DRM now will unnecessarily doom all consumers to a “one size fits all” situation that will increase costs for many of them.

DRM increases consumer value? Is this some sort of joke? This is where Amoroso is just insulting our intelligence. Let’s be clear about something. DRM is not an effective means of preventing piracy. Recent tests also indicate that DRM is holding back sales and likewise removing DRM results in a boost in sales. Engadget.com has a recent article that illustrates this point along with other points relating to this topic.

With that in mind, Amoroso is trying to make an argument to “accelerate the deployment” of DRM. Unfortunately, the entertainment industry has yet to understand that the only entity benefiting from DRM are companies like Macrovision that manufacture DRM based “solutions”. Congratulations to Macrovision for convincing the entertainment industry to purchase an unnecessary product!

Amoroso points out that DRM is needed for renting content. I agree with that. But, at least with regards to digital music, that’s proven to be a failed concept. Subscription based music has not proven to be a successful business model. Consumers are not embracing it. Instead, Amoroso argues that we’ll be stuck with a “one size fits all” and that costs will increase. Even that isn’t true. You could have DRM for renting and non-DRM for full purchases. The cost of any digital download is controlled by supply and demand, not by DRM vs. non-DRM.

DRM will increase electronic distribution –
Well maintained and reasonably implemented DRM will increase the electronic distribution of content, not decrease it. In this sense, DRM is an important ingredient in the overall success of the emerging digital world and especially cannot be overlooked for content creators and owners in the video industry. Quite simply, if the owners of high-value video entertainment are asked to enter, or stay in a digital world that is free of DRM, without protection for their content, then there will be no reason for them to enter, or to stay if they’ve already entered. The risk will be too great.

No, with regards to music, the amount of “distribution” is constant. DRM is a barrier for consumers to obtain music distribution legally. Instead, most consumers are resorting to illegal channels of distribution. The record labels have been trying to shut down these channels (peer to peer networks) for years without success. The record labels need to compete with piracy by offering a product that consumers want to buy. Consumers want high quality digital audio files to be available without DRM restrictions. Once DRM is removed, there will be an increase in the legal distribution of music files.

DRM needs to be interoperable and open –
I agree with you that there are difficult challenges associated with maintaining the controls of an interoperable DRM system, but it should not stop the industry from pursuing it as a goal. Truly interoperable DRM will hasten the shift to the electronic distribution of content and make it easier for consumers to manage and share content in the home – and it will enable it in an open environment where their content is portable across a number of devices, not held hostage to just one company’s products. DRM supporting open environments will benefit consumer electronics manufacturers by encouraging and enabling them to create ever more innovative and sophisticated devices for consumers that play late running premium content from a number of sources.

Amoroso speaks of “truly interoperable DRM”. This is a fallacy. By definition, there is no such thing, nor can there be. The whole point of DRM is being able to control the use and distribution of content. Even if every vendor used the same form of DRM, the digital content (music files in this case) would still be restricted and likewise not be “truly inoperable”. If the DRM restrictions were too liberal, then the music files could be easily shared. That would obviously defeat the purpose of using DRM in the first place. Likewise, the only way to be “truly interoperable” is to not use DRM. Again, there is no such thing as “truly interoperable DRM” and by definition, there never will be.

Sandisk wants media attention as well…

Sadly, when someone does something original others like to jump on the bandwagon in hopes of getting a little press for themselves. In this case, Eli Harari, CEO of SanDisk, is next in line to embarrass himself.

“creating solutions rather than conflict” and how they are “building an infrastructure to give consumers fair access to digital content while protecting content creators is vital for the long-term health of the music industry, as well as to our business and to our competitors.”

In short, he’s sucking up to the record labels and preaching the nonsense that they want to here. Look, Harari is “playing ball”, isn’t he a good boy? But, what solution is Harari offering?

“Consumers deserve fair use of the digital entertainment they purchase, with the freedom to enjoy content on any device they own. SanDisk’s approach is to let consumers decide how and where they acquire and play back their music.”

Translation: We don’t want to be controversial. We know our customers prefer to steal music, but as long as we’re selling music players, we don’t care.

“Proprietary systems, in short, aren’t acceptable to consumers. In recent months, there has been a rising chorus of complaints in Europe about the anti-competitive nature of closed formats that tie music purchased from one company to that company’s devices, and tie that company’s devices to its music service.”

Translation: We don’t want consumers to use the leading DRM format because we’re not part of it.

“SanDisk is already offering an alternative with its Sansa line of MP3 players, which connect to many major online music stores, including Rhapsody, Napster, URGE, Yahoo! Music, emusic and Best Buy Digital Music Store. Users purchasing songs from those services can also play them on many non-SanDisk devices.”

Yeah, and all of those music stores combined make up less than 20% of the legal download market. Even still, how is this any better? What problem does this solve? Can those same songs be played on the iPod? No. How about the Zune? No. How about Sony’s players? No. Wow that’s some solution you’ve got going there Harari. Any other pearls of wisdom you have to share?

“What’s more, the decision on using digital rights management (DRM) should rest with the music industry, not with device makers.”

Nice way to pass the buck Harari. There is an obvious problem with DRM. Instead of offering a solution, Harari just passes the buck onto the record companies. Apparently, it’s not appropriate for consumers or device makers to have a discussion on this.

“Time and again, we have seen that open choice prevails. The “walled garden” approach may offer a smoother user experience in the short run, but ultimately restricts user choice. Protecting music doesn’t require confining consumers to a single company’s service or devices. It’s time to tear down the walls.”

Really, could Harari be any more vague and “wishy-washy”? Okay let’s see… He says that open choice prevails. Well, both dropping DRM and using a “universal” DRM would allow choice of vendors. By “walled garden”, I can only assume he’s referring to proprietary forms of DRM like Apple, Sony and Microsoft are using. He talks about protecting music, but fails to acknowledge that DRM does not protect music. Then, he says it’s time to tear down the walls. Great, isn’t that what Jobs was saying in his open letter to the music industry? Clearly, the best way to tear down the walls is to remove DRM entirely.

Sometimes a compromise will do…

From a consumer perspective, we want high quality audio files which are DRM free. Maybe a more reasonable solution is to just offer CD quality audio files in a lossless format such as FLAC or Apple’s Lossless format, etc. There are a couple reasons why this would work.

1. These files would be roughly half the size of ripped CD files, contain the same audio quality. Sure, they would take up more space on your hard drive, maybe 5 times as much space as a 128bit MP3 or AAC file. But, when you think about it, compressed music files were popular 10 years ago because hard drive space was so much smaller and network bandwidth was so much less. 10 years ago, a 4GB hard drive was considered big. Now, 500GB drives are big and 750GB drives are available. With more than 100x storage on the average computer today as compared to 10 years ago, file size is not an issue.

2. Internet bandwidth is much higher now than it was 10 years ago. A much higher percentage of users are on broadband. Today, very few people are still using dial up.

3. Perhaps the most significant issue is that transcoding would not be an issue. Transcoding is the process of expanding a compressed file (perhaps when burning to CD), then recompressing that expanded file (from CD back to .mp3, etc.). When this happens, there is a loss of quality. With today’s DRM schemes, you are typically allowed to burn CDs from your downloaded music files. However, the original music files (in .mp3, .aac, .wma, etc. format) are less than CD quality to begin with. When you uncompress, then recompress those files, the quality degrades. However, if your original music file is already of CD quality, there is no loss in quality by compressing it to a lossless format (FLAC, Apple Lossless, etc.) then uncompressing it again. As such, the manual removal of DRM from a CD quality audio file would be a trivial task as it can be done through conventional means (burning to a CD, use of various audio recording programs, etc.). No complicated key decryption programs would be necessary.

4. CD quality downloads negates format interoperability issues. That is, you can create music files in any format from a high quality original.

The reason such a compromise might work is that the record labels would be able to save face by pretending DRM is stopping piracy. Let’s face it, egos are involved here. Most of the major record labels are still vocally in favor of using DRM. DRM protects music from being copied by the casual user, but it’s still hacked by more technical types. Instead, the casual user resorts to piracy via P2P networks. If the casual user were able to remove DRM themselves, they’d probably be willing to purchase the music legally and remove the DRM themselves if they were getting a superior product. Although DRM would still be an unnecessary hurdle for legitimate customers to deal with, it might be a compromise more people would be willing to tolerate. It might also be a compromise the record labels are willing to consider.

Conclusions
Neither Macrovision nor Sandisk has taken a practical look at the state of DRM. Neither company has dared to be controversial and propose a real solution to the problem. Macrovision took this opportunity to do a little self promotion by asking the industry to adapt its form of DRM across vendors. They even go so far as to say they’ll take over Apple’s FairPlay (DRM) and maintain it, etc. Unfortunately, while caught up in some delusional state, they preach about a “truly interoperable DRM” which by its very definition is a contradiction of terms.

Sandisk also wants a universal DRM across vendors in hopes that they will have a more level playing field. I’m not sure why Sandisk doesn’t realize the same thing would be accomplished by removing DRM entirely. Apparently, they are more concerned about appearing politically correct in the eyes of the record companies instead of actually listening to its customer’s demands. I suppose that’s why they’re #2 and Apple is #1 in this market.

Finally, I have to wonder if DRM would be a non-issue entirely if music files were offered with CD quality audio. DRM would be easier to defeat for the customer. Likewise, there would be less incentive to steal via the P2P networks. At the same time, the record labels would be able to save face by not removing DRM and still pretend it works.

Digital Rights Management (DRM) is used for many things, including music, video and even some software purchases. DRM has received much attention in the music industry lately, so this article will be focused on the music industry’s use of DRM. The concept behind the use of DRM is easy enough to understand. DRM provides a means of enforcing the usage of music purchased with this DRM “protection”. That is, DRM protected music is registered to a specific individual. That individual is typically allowed to register several devices that the music may be played on. If one of the registered devices (typically a computer) is retired, then the owner of the music must then “unregister” the old computer and “register” the new computer. The music will not play on a device that is not “registered” by the owner. Each owner has a limit of how many devices he/she is allowed to register, depending on the specific DRM implementation. The goal of DRM is to both prevent piracy and prevent the unauthorized use of music by the people (customers) who legally pay for said music.

What’s all of the controversy about?

There are many valid reasons for consumers to object to DRM. These reasons are summarized below:

1. Enforcing DRM is treating the legitimate customers as criminals.

Legitimate customers are treated like criminals with the assumption that they all intend to give away their music collection. As such, legally purchased music with DRM is hobbled with limitations on how the music can be used. Meanwhile, those who pirate music are not crippled with these same restrictions. Yet, the record companies can’t seem to understand why music piracy is so rampant.

2. There is no standard for DRM and likewise, interoperability has become a major issue for consumers.

There are multiple implementations of DRM and none of them are compatible with each other. Apple sells the most digital music by a wide margin (> 80% market share). Likewise its form of DRM is the “standard”. But, Apple doesn’t license its DRM to other vendors. Microsoft also has its form of DRM, but to date, it’s been a dismal failure. What’s worse is that Microsoft now has 3 forms of DRM, each version is apparently incompatible with the other. Their first attempt was “Plays for Sure” (aka Janus) which was available to all vendors. Then, they came up with a separate DRM exclusively for their Zune product line. This was an attempt to copy Apple’s business model. It also had a side affect of upsetting Microsoft’s “partners” in bed with the “Plays for Sure” model. Now, they’re coming out another form of incompatible DRM called “PlayReady”.

Really, what the hell are they thinking? I can only guess that Microsoft wants DRM in general to fail so they are contributing to this effort by obfuscating the interoperability issue as much as they can.

3. DRM often restricts the way music files may be used.

Some application software (like movie editing, etc.) will not allow the use of “protected” music files because this usage is in conflict with the record company’s defined usage for their music.

4. DRM is not effective.

It’s a simple fact; no form of DRM has ever been immune to hackers. The DRM is cracked, the vendors responsible for the DRM try to revise the DRM, and then the hackers get working on the next version. Rinse, repeat.

5. The majority of music purchased is not crippled with DRM.

The record labels insist that DRM is required. The alleged fear is that if digital copies of their music were left unprotected, they’d be pirated on mass. It would be as if they just opened up the floodgate to piracy. Of course, this claim makes absolutely no sense given the fact that roughly 90% of the music sold by the record companies is on CD and is likewise inherently unprotected, not to mention available at a higher quality. Sure, some record companies have tried to protect CDs, but all attempts have failed. The most notable failure was Sony’s root kit debacle.

Traffic on the peer to peer (P2P) networks should indicate that piracy is alive and well. Any song available for legal download is also readily available for illegal download. Consumers want DRM free digital downloads. The record labels don’t provide consumers with the product they want. DRM-free music files (i.e. what the consumers want) do exist on the P2P networks for free. Yet, the record labels don’t understand why so many people pirate music. By offering an inferior product and charging a premium for it, the record labels are actually encouraging piracy.

The record companies want people to keep buying CDs. This way, you purchase an entire album rather than just the one song you really want. I’m guessing that the record labels want digital downloads to be inconvenient enough for you to buy the CD instead. The problem is, consumers want the option to just purchase a single song. This is the digital age, the “genie is out of the bottle”. Gone are the days where the record companies have full control over what they sell you. If the product consumers want is not offered through legal channels, the majority of people will resort to illegal channels of obtaining their music. The best way to fight piracy is to compete with it by providing a superior product for a modest premium.

The tides are turning…

Recently, Bill Gates started speaking out against DRM vocally, despite Microsoft’s actions to actively support it by all means possible. While we all understand that it’s necessary to support DRM for the time being if you wish to sell music from the major labels, but Microsoft has gone above and beyond that level of draconian philosophy with regard to music sharing in it’s Zune product, not to mention the level of DRM built into its Vista operating system.

The following is a summary of Gates’ comments on DRM:

Gates said that no one is satisfied with the current state of DRM, which “causes too much pain for legitimate buyers” while trying to distinguish between legal and illegal uses. He says no one has done it right, yet. There are “huge problems” with DRM, he says, and “we need more flexible models, such as the ability to “buy an artist out for life” (not sure what he means). He also criticized DRM schemes that try to install intelligence in each copy so that it is device specific.
His short term advice: “People should just buy a cd and rip it. You are legal then.”

Bill Gates isn’t calling for the end of DRM, but he’s acknowledging that it isn’t working in its current form. While that is very much just pointing out the obvious, it’s also acknowledging the criticism voiced by consumers which is something the record companies have yet to do.

Of course, it’s difficult not to be skeptical of anything Bill Gates says. If history has taught us anything, he’s a very calculated person that says things for a reason. He’s not attacking DRM in concept; rather, he’s attacking DRM in its current form. That is, Gates wants DRM because it’s a means of locking in users. The more songs you buy in one form of DRM, the more likely it is that you’ll be to vested in that form of DRM to ever switch to a competitor. Right now, Apple’s FairPlay DRM is the dominant player, by a long shot (> 80% market share). Given that perspective, it’s not hard to imagine why Bill Gates is not happy with DRM in its current form.

Further evidence that the tide is starting to turn come in the form of EMI’s decision to test the waters with a few DRM free songs. This is likely the prelude to a bigger step in that direction. Once one of the top 4 record labels does this with a large collection of music, the others will follow if (when) it proves successful.

In principle, the idea is that Apple’s DRM is the de facto standard due to Apple’s music sales performance. Likewise, if Apple licensed it’s DRM to other companies, the interoperability issue would be solved. While I agree that Apple should license its DRM to other companies, I also believe that this is a waste of effort as it changes nothing. DRM is still bad for consumers. Opening the licensing of one DRM is not going to force companies to adopt it, nor is it going to fix other interoperability problems with other DRM schemes. So, while it might help somewhat, it’s not going to fix the problem. To use an analogy, it would be like putting a band aid on a major wound that requires stitches and perhaps surgical attention.

Apple responds to the pressue…

In an uncharacteristic move, Steve Jobs wrote an open letter to the music industry.

Apple brokered the first deal with the record labels to sell music on-line. Jobs provides background information explaining how Apple must license the rights to sell music through the record companies. It is the record companies that dictate the requirements of how the music will be sold. DRM was and still is a requirement for the privilege of selling the record label’s music on the iTunes Music Store (iTMS). Jobs goes on to layout three scenarios for the future of on-line music sales through the iTMS.

1. Continue the current course. Apple’s music sales will only play on iPods, Microsoft’s music sales will only play on Zunes, Sony’s music sales will only play on Sony players, etc. Apple’s statistics indicate that on average, 3% of the average iPod’s music is purchased through Apple’s store. Therefore, there is no real issue of vendor lock in.

2. The second alternative is for Apple to license FairPlay to other vendors. Jobs claims that Apple is contractually obligated to fix cracks in its DRM in a very short amount of time. This is currently done by rolling out changes to Quicktime/iTunes, iPod firmware updates and changes to Apple’s music store. By allowing other vendors into this equation, Apple feels it wouldn’t be able to meet its contractual obligation to fix the cracks in a timely manner if it had to roll out a solution to all of the other vendors as well.

That’s a reasonable argument, but I’m not sure it holds water. Microsoft has had its “Plays for Sure” DRM cracked and worked with other vendors on the fix. If Microsoft can do it, then surely Apple can do it. If necessary, in light of new requirements, Apple should renegotiate the timeframe it has to make such fixes.

“The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.”

Jobs is clearly laying the DRM blame on the record labels and making it clear that Apple would rather not have DRM at all. Many were starting to believe that Apple was the one pushing the DRM because it gives them vendor lock in. Jobs clearly put that notion to rest.

On the other hand, some have noted that at least some small percentage of Apple’s current music library belongs to the independent labels that do not require DRM. Some music stores such as emusic.com do not use DRM and only sell music that does not require DRM. If Apple truly does oppose DRM, they should make music sold from the independent labels as DRM free downloads. This just might start to embarrass the other labels to follow suit.

Criticism about Apple’s position…

Just as Bill Gates can’t make a comment without people looking for motives behind what he says, the same applies to Steve Jobs. In this case, Apple has much more influence on the music industry than Microsoft does. As expected, the conspiracy theorists are out in full force.

Rather than rehash what’s already been said, I highly recommend reading John Gruber’s Daring Fireball blog on this topic.

“For a company with a tiny share of the computer market and an increasingly perilous first mover advantage selling portable music players Apple punches well above its weight in coverage of its every move.”

So, Apple’s staggering lead in music related sales (both the iPod and the iTunes Music Store) are in danger and Apple’s lead is only due to its “first mover advantage”? Really? How many years has Apple had this lead? Whatever… At least Thompson does us a courtesy of demonstrating both his anti-Apple bias and his ignorance right up front.

Thompson goes on with one rant after another about how Apple has been getting lots of attention in the media. He’s apparently upset that Apple’s Macworld event completely silenced the general industry’s CES event that occurred in the same timeframe. He goes on about the announcement of the settlement with the Beetles (Apple Corp. trademark issue), followed by a rant about the Apple commercials on TV. So, what are you recommending Thompson? Do you recommend Apple or any other company try to stay out of the media? Yeah, that’s good for business.

Then, Thompson takes issue with the fact that the current version of iTunes doesn’t work properly with Microsoft’s newly released Vista operating system. He suggests that Vista has been around for a while in beta form, therefore Apple had plenty of time to prepare for Vista’s release. Okay, that’s a fair comment, but it’s not like this is something that’s unique with Apple. Why doesn’t Thompson mention the numerous other third party programs that have issues running on Vista? Similarly, how long has Apple been shipping Intel based Macs? Where is the Intel native Microsoft Office? Surely, Microsoft has had ample time to take care of this as well, right? It’s funny how he never mentions that.

Then, Thompson goes on to make a point of how Apple refuses to license its DRM and in the same sentence he contradicts himself by noting Motorola’s iTunes phone.

Better yet, try to follow this bit of logic…

“Jobs also said that Apple would stop using DRM in an instant if they could.
I don’t believe him. If Apple switched off Fairplay then they would probably sell a lot more songs, on which they make very little money, and a lot fewer iPods, on which they make a lot. I don’t buy songs from Apple’s store because I don’t like DRM. “

Apple has made no secret that the iTunes Music Store is marginally profitable. That said, the iTMS has never been a driver for sales of the iPod. Statistically, only 3% of songs on the iPod are from the iTMS. It’s just the opposite. Strong sales of the iPod fuel sales of the music store, not the other way around.

“But Jobs can see which way the wind is blowing, and he can see that the record companies are finally tiring of their painful, expensive and ultimately unsatisfactory relationship with DRM.”

Okay, so now Jobs was speaking out against DRM because he sees which way the wind is blowing. The direction of the wind is much more related to the pressure Apple is under to license its DRM. Apple doesn’t want to do this and instead prefers no DRM. This should be clear from Apple’s “Rip. Mix. Burn.” ad campaign years ago when iTunes was introduced. I certainly do believe the tide is beginning to turn in favor of dumping DRM. However, this isn’t a new direction for Apple, nor could it possibly happen without pressure from Apple to make it happen. Apple had to agree to DRM in the beginning. Now that Apple has sold more than 2 billion songs on-line and commands greater than an 80% market share of legal music downloads, Apple has a bit more clout in terms of making the record labels change course.

“Jobs has to position Apple for this brave new world, and he knows that his charisma is such that if he rushes to the head of queue and claims to be leading the charge then some, at least, will believe him.
Sadly he’s likely to be crushed under foot by those who really understand the music business and didn’t sell their souls to the record companies back in the days when they believed in DRM.”

Thompson is trying to paint a picture that Apple is not reacting to the legal pressure it’s facing with regards to FairPlay licensing, but rather it’s trying to pretend it’s leading the pack with the anti-DRM movement. Better yet, Thompson suggests Apple sold its soul to the record companies and doesn’t “really understand the music business”. Well, if nothing else, it’s always amusing to read the thoughts of a bumbling journalist that apparently hasn’t been following the events of the music industry. Apple apparently doesn’t get credit for being the first company to broker a deal with ALL of the record labels to sell legal music downloads. Apple doesn’t get credit for creating the best portable music player, nor does it get credit for creating the best music jukebox software, nor does it get credit for creating the business model for an on-line store and integrating all of the above properly. The rest of the industry is following Apple, but Apple doesn’t understand the music industry. Apple is about to be “crushed under foot”, despite leading the pack with > 80% market share for on-line music sales and no sign of weakening after all these years.

The Empire Strikes Back…

Not surprisingly, Edward Bronfman jr., head of Warner Music Group disagrees with Steve Jobs’ position.

Warner Music has come out against the proposal, which would allow consumers to purchase digital music downloads without DRM. In an earnings conference call late last week, Warner Music CEO Edgar Bronfman said the idea was “completely without merit.”

I suppose if you’re the head of a major music label, you’re allowed to just say something is “completely without merit” without actually providing an explanation. This is sort of the response one would expect from a third grader who’s losing an argument badly. Considering the reasons for dumping DRM have been logically spelled out and do make sense, Bronfman is coming up short in the way of logic.

In another event, he goes on to say…

“DRM and interoperability are not the same thing,” Edgar Bronfman Jr., chairman and CEO of Warner Music Group, said in a speech at the 3GSM World Congress in Barcelona on Wednesday.
“We believe in interoperability,” he said. “Consumers want it and should have it. We at Warner, and I hope the rest of the music and content industry, will make it as easy as possible to achieve interoperability.”

Great, so he claims that DRM and interoperability are not the same thing. Yet, he offers no solution to the current problem. It’s clear he doesn’t want to back down from his insistence for the use of DRM, despite its lack of effectiveness. He also acknowledges that there is an interoperability problem, but he doesn’t offer a solution. He’s either not very bright or he’s hoping his audience isn’t very bright. Mr. Bronfman, you’re not making a convincing argument. Give up on the DRM issue already.

Conclusions

DRM is an ineffective means of preventing piracy, particularly in the context of the music industry. Between the sales of music on CDs (which are DRM free) and the wide spread use of P2P networks, DRM cannot possibly achieve the goals it’s designed to do. Worse, it’s bad for consumers as it imposes unnecessary restrictions on the usage of music purchased in this fashion. As a result, DRM not only deters legitimate music purchases, but it actually encourages the piracy of music.

The best way to prevent piracy is to compete with it. This can be accomplished by offering a product consumers want (high quality, DRM free downloads).

There is evidence that the tide is beginning to turn in favor of abandoning DRM. One of the four major labels will have to take the first step. EMI is dangerously close to doing so already. Apple is under pressure to license its FairPlay DRM, but instead, it’s challenging the music industry to acknowledge DRM is a failure. The music industry continues to see declining revenue and this trend will likely only continue as long as the record companies are not producing a product that consumers want.

One thing is for certain, this issue won’t be resolved until the record companies start to take a practical look at the DRM issue and put their egos aside. As it is, annual revenue is projected to decline over the next few years and digital music downloads are not currently making up the difference. I believe this is largely due to the use of DRM and thereby presenting consumers with a product they do not want. While I don’t advocate stealing music, I certainly do understand why it’s the most popular method of obtaining music these days.